When public companies tell the world how much money they made over a quarter, they have to follow accounting guidelines intended to keep those financial figures honest and consistent.
However, for better or worse, alongside the profit figures that comply with those standards, many companies also report more forgiving, “adjusted” versions of those figures. Those adjustments are intended to show what a company’s bottom line might have looked like if those standards — and the financial impact related to any number of issues like taxes, litigation, layoffs, the impact from the war in Ukraine, changes in the value of currencies or cannabis plants or whatever else — essentially didn’t apply.
In the fourth quarter, among the 30 companies in the Dow Jones Industrial Average, the gap between those two types of profit was far wider than normal, according to a FactSet analysis published Thursday.
That analysis found that the median difference between per-share profit reported based on generally accepted accounting principles, or GAAP, and the adjusted kind — non-GAAP — stood at 31%. That’s far above the norm for that difference — 11.7% — based on five-year averages.
It’s also the fourth biggest difference between GAAP and non-GAAP earnings per share for Dow companies since FactSet began tracking it in 2016. And the last time that spread surpassed 31% was during the second half of 2020, when the pandemic upended the economy.
The biggest such differences in the most recent quarter could be found in companies like drugstore chain Walgreens Boots Alliance Inc.
WBA,
at 925%. The company, in its earnings release, cited “challenging retail market trends in the U.S. and a 21 percentage point headwind from a higher tax rate.”
The spread for chemical and materials giant Dow Inc.
DOW,
was 386.7%, as it digested the effects of restructuring, litigation, pension settlements the devaluation of Argentina’s peso and other matters. Companies like Verizon Communications Inc.
VZ,
Merck & Co.
MRK,
Salesforce Inc.
CRM,
and Johnson & Johnson
JNJ,
rounded out the top 10.
The adjustments that companies make to their profit figures — which tend to take more priority among the Wall Street analysts whose commentary can drive stock action — have long been a matter of debate among executives and investors.
Many companies say those adjustments allow them to express their profit in a purer form that factors out the impact of “once-in-a-lifetime” events and random noise. But many others say the practice gives company leadership too much leeway to say what does and doesn’t count when calculating profits.
“Supporters of the practice argue that it provides the market with a more accurate picture of earnings from the day-to-day operations of companies, as items that companies deem to be one-time events or nonoperating in nature are typically excluded from the non-GAAP (earnings per share) numbers,” FactSet Senior Earnings Analyst John Butters said in the report on Thursday.
“Critics of the practice argue that there is no industry standard definition of non-GAAP EPS, and companies can take advantage of the lack of standards to exclude items that (more often than not) have a negative impact on earnings to boost non-GAAP EPS,” he continued.
This week in earnings
While fourth-quarter earnings season is largely in the books, the week ahead will feature more retailers, led by Target Corp., Costco Wholesale Corp.
COST,
and Kroger Co. Taken together, the results will show us how much room higher-priced groceries have left for shoppers to buy clothing or anything else.
Elsewhere, clothing chain Gap Inc.
GPS,
reports results, as it tries to restore cultural relevance to its namesake stores, improve marketing at Old Navy and make Banana Republic a more “premium” destination. Bargain retailers Ross Stores Inc.
ROST,
and Burlington Stores Inc.
BURL,
also report, after rival TJX Cos.’ results were better than expected on holiday-season enthusiasm. Nordstrom Inc.
JWN,
also reports, albeit after warning of “softening” consumer spending ahead of the holidays. Foot Locker Inc.
FL,
will also release its earnings, after Nike Inc. cut its sales outlook.
Elsewhere in retail and clothing, Abercrombie & Fitch
ANF,
Victoria’s Secret & Co.
VSCO,
Big Lots Inc.
BIG,
and American Eagle Outfitters Inc.
AEO,
report. Outside of retail, results are due from Broadcom Inc.
AVGO,
Marvell Technology Inc.
MRVL,
and DocuSign Inc.
DOCU,
The number to watch
Target sales: Target
TGT,
which reports on Tuesday, has spent the past two years as something of gauge for how much people are buying things they want — like clothing, or TVs or laptops or furniture — as opposed to the things they need. Unlike rival Walmart Inc., those kinds of products make up a bigger share of Target’s business than groceries, and Target has remained cautious on its expectations for consumer demand.
“Expect sales to remain challenged in 4Q,” BofA analysts said in a note on Friday, and adding that they were bracing for “continued soft discretionary trends,” even as declines in customer traffic show signs of getting better. Price increases for food and drinks haven’t been as aggressive recently. That’ll be a relief for customers. But it won’t help Target’s sales.
The call to put on your calendar
Kroger: Grocery-chain Kroger
KR,
reports results on Thursday. Those results will arrive after the Federal Trade Commission sued to block the merger deal between the company and Albertsons Cos.
ACI,
saying it would further push grocery prices higher. Kroger’s earnings call will offer more detail about where grocery prices and consumer demand stand, and potentially shed more like on how executives are thinking about growing regulatory pushback.